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Edited Transcript of SIX earnings conference call or presentation 30-Apr-20 1:00pm GMT

Q1 2020 Six Flags Entertainment Corp Earnings Call

NEW YORK May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Six Flags Entertainment Corp earnings conference call or presentation Thursday, April 30, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Leonard A. Russ

Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis

* Michael Spanos

Six Flags Entertainment Corporation - President, CEO & Director

* Stephen R. Purtell

Six Flags Entertainment Corporation - Senior VP of IR & Treasurer

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Conference Call Participants

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* Alexander Rocco Maroccia

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Brett Richard Andress

KeyBanc Capital Markets Inc., Research Division - Associate VP

* Ian Alton Zaffino

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* James Lloyd Hardiman

Wedbush Securities Inc., Research Division - MD of Equity Research

* Michael Arlington Swartz

SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst

* Ryan Ingemar Sundby

William Blair & Company L.L.C., Research Division - Research Analyst

* Steven Moyer Wieczynski

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst

* Timothy Andrew Conder

Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst

* Tyler Anton Batory

Janney Montgomery Scott LLC, Research Division - Director of Travel, Lodging and Leisure

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Six Flags First Quarter 2020 Earnings Conference Call. My name is Beverlyn, and I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Steve Purtell, Senior Vice President, Investor Relations.

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Stephen R. Purtell, Six Flags Entertainment Corporation - Senior VP of IR & Treasurer [2]

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Good morning, and welcome to our first quarter call. With me are Mike Spanos, President and CEO of Six Flags; and Lenny Russ, our interim CFO. We will begin the call with prepared comments and then open the call to your questions. Our comments will include forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those described in such statements, and the company undertakes no obligation to update or revise these statements.

In addition, on the call, we will discuss non-GAAP financial measures. Investors can find both a detailed discussion and business risks and reconciliations of non-GAAP financial measures to GAAP financial measures in the company's annual report, quarterly reports and other forms filed or furnished with the SEC. And at this time, I will turn the call over to Mike.

Operator, I think Mike's got disconnected from the call. I think he's going to dial back in.

(technical difficulty)

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [3]

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Hey, Steve, I'm back on.

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Stephen R. Purtell, Six Flags Entertainment Corporation - Senior VP of IR & Treasurer [4]

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Okay, you can start the scripts.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [5]

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Okay. Sorry about the technical difficulties, everybody, it's a new world. All right. Good morning, everyone. How are you? Thank you for joining our first quarter earnings call.

We are living in unprecedented times with the impact of the COVID-19 pandemic disrupting all of our lives. As a company, Six Flags is committed, first and foremost, to ensuring the safety of our guests and our employees, and we are abiding by all CDC, state and local health guidelines related to the outbreak. Despite this unexpected disruption, Six Flags' long-term growth prospects and value creation opportunities have not changed.

On today's call, I will discuss some of the steps that we have taken to position the company to weather the storm. Then Lenny will discuss our financial performance (inaudible) and how we are setting ourselves up to capture this opportunity to emerge even stronger as we navigate through the crisis.

First, I want to thank our Six Flags team. I could not be more proud as they have responded with a passion for each other, our business, our guests and our communities. We've donated food to local food banks, given PPE and medical equipment to medical personnel and provided staging areas for blood drives in the National Guard. Our entire team has rallied in this time of need preparing for the worst while hoping for the best. It is truly a privilege to lead this outstanding group of people.

Next, I want to thank our financial partners. They responded quickly and urgently to provide us with additional liquidity that will allow us to navigate successfully through this period of uncertainty. Their support of Six Flags is a testament to their confidence in our strong brand, our resilient industry and our dedicated management team.

As I shared on our last earnings call, we are focused on reinvigorating growth in our base business. We started the quarter strong and we are already beginning to see progress on several initiatives underway prior to suspending operations. Our Six Flags over Texas Park had successfully initiated year-round weekend operations. Our California parks had strong attendance led by our new ride at Magic Mountain, West Coast Racers. We improved weather -- we had improved weather versus prior year, and our strategy to target single day guests was working. As a result, before suspending operations, our attendance was up 19% versus prior year, with single day paid attendance increasing 38%.

In response to the COVID-19 pandemic, we suspended operations on March 13. This led to a loss of attendance from the 11 parks that were open or scheduled to open prior to the end of the quarter. Immediately after suspending the operations of our parks, we implemented aggressive cost-saving measures that largely offset the resulting revenue decline.

Evolving conditions mean we need to remain nimble, flexible and focused on modifying operations. So we are prepared to reopen in a new environment when it is safe to do so. All reopening decisions will be determined locally and on a park-by-park basis in accordance with CDC guidelines and in partnership with state and local authorities. In the wake of the pandemic, we analyzed many scenarios, developed a strong plan and began taking decisive cost actions while maintaining readiness until we can reopen our parks.

We also have been proactively communicating with our guests to preserve our Active Pass Base. Our plan included taking crucial steps to strengthen our balance sheet and to protect long-term shareholder value. These actions have provided us with sufficient liquidity to meet our cash obligations through the end of 2021, even if we remain in a minimal revenue environment. But we'd likely require additional covenant relief from our credit facility lenders if the suspension of operations lasted through the end of 2021.

I am committed to an even greater degree of transparency to our team members, our guests and our stockholders. We are encouraged that the regional theme park industry has historically proven resilient through times of turmoil and believe we can thrive and return even stronger once the crisis subsides.

Before I share some additional thoughts about our future, I will turn the call over to Lenny to provide details of our first quarter performance and response to the COVID-19 crisis. Lenny?

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [6]

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Thank you, Mike, and good morning to everyone on the call.

I will start with a discussion of our first quarter 2020 performance and then address the actions we've taken to improve our liquidity in response to the COVID-19 crisis.

Our total revenue in the first quarter declined by $26 million or 20% to $103 million. Attendance declined 584,000 or 27% to 1.6 million guests. The entire attendance decline occurred after we suspended operations. Prior to the suspension of operations, attendance was up 255,000 guests or 19%. From March 13 through the end of the quarter, our attendance declined by 839,000 guests.

Guest spending per capita in the quarter increased 17% to $56.60. Admission per capita increased 24% due to higher recurring revenue from members who have passed their initial 12-month commitment period, along with strength in single day attendance per caps and other pricing initiatives. As a reminder, when our members enter their 13th month in membership, we begin recognizing the revenue on a monthly basis according to their cash payments. Whereas for our season pass holders and members who have been with us for 12 months or less, we recognize revenue based on visitation.

The suspension of operations at our park significantly reduced attendance in the first quarter, which caused a normally large increase in reported admissions per capita. Prior to the suspension of operations, admissions per capita through February was up 7%, driven by a higher percentage of 13-plus month members as well as single -- strength in single day per caps and other pricing initiatives.

In-park spending per capita increased 5%, primarily due to higher revenue from membership dining. We recognized revenue from certain corporate sponsorships in the first quarter. Going forward, we are working with our corporate partners on a case-by-case basis to defer other planned programs until the parks reopen. Consistent with our guidance on the prior earnings call, we did not recognize any revenue from China or Dubai. However, our park in Saudi Arabia remains on track for a 2023 opening.

On the cost side, cash operating and SG&A expenses decreased by $13 million or 9%, primarily due to cost savings measures we took after suspended operations. Modified and adjusted EBITDA for the quarter were both losses of $42 million, an increased loss of $10 million versus the prior year quarter. As Mike mentioned, we have taken aggressive cost actions to mitigate our cost -- cash outflows.

We eliminated nearly all of our seasonal labor costs. We announced a 25% salary reduction for all executive officers and salaried employees and a 25% reduction in scheduled hours for all full-time hourly employees. We suspended all advertising and marketing costs. We deferred the $20 million of increased investments we had planned to improve the guest experience, and we identified $10 million to $20 million of additional nonlabor operating cost savings for 2020.

We are also taking steps to defer or eliminate at least $40 million to $50 million of capital expenditures and now expect to spend $90 million to $100 million in 2020. We have kept our full-time team members on the payroll and maintain their benefits at the same cost. We believe this leaves us in the best position to open our parks quickly.

Based on all the measures we have implemented and additional measures we could implement in a more prolonged suspension of operations, we estimate that our net cash outflows would average between $30 million to $35 million per month through the end of 2020. And this includes all operating expenses and capital expenditures related to our parks, along with contractual rent, interest and partnership park obligations.

We are obligated each April to offer to purchase the outstanding partnership units from the unitholders who own the third-party interest of Six Flags over Texas, Six Flags over Georgia and Six Flags White Water Atlanta. We calculate the offer price based on the trailing 4 years of EBITDA of each of the partnership parks. In light of the suspension of park operations, which would cause the value of the partnership park units to decrease in 2021 and thereafter, we set a minimum price floor for all future purchases based on the 2020 offer price.

This floor provides a significant incentive for the partners to retain their units and not put them back to the company. As a result, approximately $5 million worth of units were put to Six Flags during the current year tender period that ended on April 28 after the general partner for each partnership exercised their right of first refusal to purchase 1/2 of the tendered units.

Our partnership park obligations also require us to pay an annual distribution of $42 million to the unitholders in 2020. We will make these payments in the third and fourth quarters, even if the suspension of park operations continues. These partnership units represent excellent investments for the unitholders with a yield of nearly 8% guaranteed by both Six Flags and Time Warner, an indirect subsidiary of AT&T, which is why we have historically experienced such a low volume of tendered units.

Turning to our Active Pass Base, which represents the total number of guests enrolled in the company's membership program or that have a season pass, we were seeing improving trends through February due to the strong membership sales in 2019 as more members remained with us into 2020 versus the prior year. Unfortunately, we lost significant season pass and membership sales in March and April as our parks have not been able to open due to the impact of COVID-19.

Our Active Pass Base, as of March 31, was down 10% compared to the prior year quarter. And as of today, our Active Pass Base is down 20%. We are proactively working to retain our existing members and season pass holders in several ways. First, we offered day-per-day extensions to our season pass holders for each operating day we are closed. Second, we offer to automatically upgrade memberships to the next tier level for the rest of the 2020 season for members who continue to make payments until the parks reopen. Third, we offered to pause payments for any member requesting to do so. Our research shows that our guest retention offers are appreciated. We still have 2.3 million members making monthly payments, providing an important source of revenue and cash flow to help us maintain core personnel functions while our park operations are suspended.

Our $30 million to $35 million monthly cash outflow forecast assumes minimal membership revenue but no season pass revenue. Based on guest feedback, we currently anticipate that most of our paused members will return to active paying members once we reopen and conditions are stable again. In addition, we will actively try to recruit our canceled members back to our programs once our operations have resumed. We have received very few refund requests for season passes. While we have no contractual obligation to make a refund and almost all of our existing pass holders have used their pass at least once, the satisfaction of our guests is very important to us. We are actively engaged in conversations with them to ensure their continued loyalty.

Deferred revenue of $149 million was down $29 million or 16% to prior year. This was due to the decline in our Active Pass Base as well as the higher number of 13-plus month members, whose revenue is recognized monthly and therefore, has minimal contribution to deferred revenue. I would now like to discuss our capital structure and liquidity position. We have historically maintained a very balanced approach to our capital structure, preserving secured debt capacity that allows us to quickly raise capital in times of need. In addition, we have no debt maturities until 2024. Prior to this crisis, we reduced our first quarter dividend by 70% to $0.25 per share and paid $21 million in dividends, a reduction of $48 million compared to the first quarter of 2019.

We invested these dividend savings to repurchase $51 million of our 2024 bonds, in alignment with our goal to deleverage our balance sheet. We also invested $51 million in capital expenditures net of insurance recoveries in preparation for the parks opening for the season. As Mike mentioned, upon suspending the operations of our parks, we took several financing steps to enhance our liquidity position. First, we increased the size of our revolver from $350 million to $481 million, providing an additional $131 million of liquidity. Second, in conjunction with our bond offering, we obtained an amendment to our credit facilities that I will describe further in a moment. Third, we raised $725 million with a heavily oversubscribed and upsized secured notes offering priced at 7%. Finally, we used part of the bond proceeds to pay down $315 million of our term loan and the outstanding balance on our revolver.

Because of these steps, our pro forma liquidity position as of March 31 was $832 million. This included $460 million of available revolver capacity, net of $21 million of letters of credit and $372 million of cash. In addition to having ample liquidity, our credit agreement amendment allows us to suspend testing of our senior secured leverage ratio covenant through the end of 2020 and to use modified testing of the ratio through the end of 2021, giving us the flexibility to manage our business.

As part of the amendment, we agreed to a $150 million minimum liquidity covenant that will apply through the period of the amendment. We have suspended our dividend and share repurchases for the foreseeable future. And our capital allocation strategy will be focused on paying down debt to return our net leverage ratio to between 3 and 4x adjusted EBITDA. In addition, as a result of all the uncertainty, we withdrew our guidance and postponed our Investor Day until we have had the opportunity to develop our new strategic plan after the crisis.

In summary, we have moved swiftly and decisively over the last 6 weeks to implement numerous initiatives that will help the company weather through these uncertain times. Now I'll pass the call back over to Mike.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [7]

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Thank you, Lenny. I would now like to turn to our future and discuss what we are doing to ensure that we emerge from this crisis in a strong position to delight our guests and to deliver long-term profitable growth for our shareholders.

While our park operations are currently suspended, this has not slowed the progress we are making to profitably grow our base business in the future. I would like to highlight 3 key initiatives that our team is focused on right now.

First, we are reassessing all elements of our cost base. The shutdown of our operations has allowed us to evaluate each line item of our cost structure in order to determine what is essential. We've been forced to operate more efficiently in this environment and we expect to become a more productive organization.

Second, we are extensively soliciting feedback from our guests in order to understand their expectations in a socially distanced world and also understand what we should expect in terms of potential visitation once our parks reopen. Our large Active Pass Base allows us to have meaningful dialogues with our guests during times like these which helps us to make informed decisions despite an uncertain environment.

We have learned quite a bit over the past month, including the following: As it relates to guest expectations once our parks reopen, the #1 focus is on sanitization of our parks. It is very important to our guests that we wipe down our rides with increased frequency, including a thorough sanitization every night, that we provide handwashing stations throughout our parks and that we provide hand sanitizers to our guests.

Our guests also would like us to enforce some form of social distancing in our parks and potentially limit the amount of guests boarding our rides or congregating in certain areas at the same time. In terms of our guests' desire to visit our parks, as of now, over 50% of customers responded to survey indicated that they would visit our parks today if they were open. In addition, nearly 80% of guests indicated that they were likely to visit our parks again in 2020 if we implemented certain health measures such as enhanced sanitization.

Third, we are continuing the strategic work I mentioned on our last earnings call. This will allow us to accelerate our earnings growth once we return to a normalized environment. One focus area that we previously highlighted was the recapture of lost single day guests, and we have already seen progress on this initiative through our focused and targeted offers. While this is promising, the majority of our lost single day attendance came during our peak summer months. So we will lean heavily into this revenue management initiative to drive even more meaningful results when our parks are operational.

Another strategic priority is to incorporate technology into our parks to streamline the guest experience and to make our parks more efficient. While many of these projects will take time, our IT team has done some outstanding work. We are working on additional initiatives such as virtual queuing for rides, increasing cashless transactions, and the ability to order food through our app on a guest's phone, reducing the need to stand along lines. Waiting in long lines is consistently ranked as the #1 pain point in our guest experience, so we believe that guests will be thrilled by these technology improvements.

Coincidentally, this should also help us to operate in a socially distanced environment by reducing the need for people to stand in line next to one another. Technology will also allow us to improve our ways of working in the parks to be more effective and efficient slowing the growth rate of operating expenditures as we execute productivity initiatives. Looking ahead in 2020, we cannot predict with any certainty the length and severity of the disruption from COVID-19 or how long and deep the economic impact will be. We are working with state and local government officials to determine which parks can open first based on the lifting of restrictions by local health authorities.

This is clearly a very dynamic situation as new information surfaces daily, and we are continuously reevaluating the potential timing for each of our parks reopenings. Once we determine a park is ready to open, we anticipate a 2- to 3-week ramp-up period. Our parks go through an opening process every year and are very meticulous in this process to ensure the highest standards of guest safety are met.

We have maintained contact with our seasonal labor force to be able to activate them as quickly as possible. Given the current environment and the recent increase in unemployment, we do not believe we'll experience the same type of labor shortages or inflation we had warned about on our full year 2019 earnings call. It is also worth noting that we have plenty of experience operating our parks profitably with low attendance levels as we are often forced to do during rainy days, inclement weather periods. As a result of our experience reducing variable labor in our parks, the level of attendance required for each park to breakeven is relatively low. Once open, we will likely need to modify our operations to accommodate concerns from health officials and our guests. Enhanced attention to health and safety procedures may add some materials and labor costs to our operations. And we are committed to taking necessary measures to make our guests feel comfortable visiting our parks.

The good news is that in the weeks before we suspended the operations of our parks, we had already begun implementing enhanced sanitization and other health-related procedures. Therefore, we will be more than prepared to implement the required measures across all of our parks when they reopen. Almost 90% of our attendance is drawn from within 150 miles, making it easy for our guests to reschedule visit to Six Flags because it is local and does not require air travel.

Historically, we have witnessed pent-up demand after prolonged closures as we saw with the swine flu in 2009. And based on our surveys, it seems that our guests are eager to return to our parks. As I said during the last earnings call, urgency, transparency and accountability are priorities for me. Our Board and I are completely aligned on our actions and priorities.

In the near term, our focus is on preserving liquidity and on maintaining financial and operational flexibility. Because of the actions we have taken to shore up our balance sheet and reduce our operating costs. I feel confident that we have more than enough liquidity and financial flexibility to operate under any scenario we encounter.

Longer term, we are taking this time to develop productivity and top line initiatives, setting us up to deliver even stronger, profitable earnings growth when we open our parks again. We are extremely confident in our collection of assets and our company's ability to generate cash flow and shareholder value over the long term and in the enduring strength of the consumer experience economy.

Six Flags is a leading innovator with a beloved 58-year-old brand, dedicated employees and loyal guests. We operate in a highly attractive markets, and our unique assets provide a truly differentiated experience in themed entertainment. We remain focused on enhancing the strength of the base business and deleveraging. And have positioned ourselves to emerge stronger on the other side of the pandemic.

We look forward to updating you on our progress during the second quarter earnings call. Beverlyn, at this point, could you please open the call for any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of James Hardiman of Wedbush Securities.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [2]

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So the #1 question I keep getting and I'm hoping you can help me with is just what the parks are going to look like in this socially distanced environment. And you talked about some of this in the prepared remarks. But maybe help us think through how you would go about limiting the number of people in your parks, number one. Sort of what technologies you would use, how you would communicate that with potential guests and then how you would limit people in line and potentially on the rides. I know you talked about technical investments, technological investments that are eventually coming. Are you going to need those to be up and running as you think through how to do virtual queuing and the like?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [3]

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Yes, James, how are you doing? Well, I think, first, it's a really good question. It's fundamentally what park present teams have been working on. I mean the first thing is we've got to gain the trust of state and local health officials. They've got to feel comfortable we can protect the safety of our guests and our team members. The second is we have detailed plans that have addressed the new normal. We're using those plans and discussing those plans based on direct guest feedback, medical advice from our epidemiologists, local health officials and also CDC guidance.

What that means is when you think about the new normal, we're going to have to implement temperature checks. We're going to be wiping down rides throughout the day. We're going to have hand washing stations, free sanitizers, masks, sanitization of the parks each night. And we're going to have to enforce social distancing in all areas, starting from the parking lot to the rides, the queue lines and the dining areas. And that's going to be the reality and a manual reality as well. Now we already began implementing these measures, as I said, before we suspended operations.

So we're very prepared how we do this manually and how we coach guests as they come -- how they come in. So I think there's going to be 2 phases. There'll be some phases where ideally we open up parks sooner than later. And we're going to have to be there to coach the guests as they come in. Over time, what I'd like to do is continue to implement technology to enforce more of a contactless environment, that'll continue to ramp up. So that's how we're thinking about it.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [4]

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Okay. But the latter, do you expect to be available as soon as this summer? The latter, meaning a phone app that would allow people to know when their ride is ready as opposed to people in the park sort of directing people where to go? And how do you communicate with people? Is there a point where you're turning away guests in this scenario? Presumably, I would think that, that would be the case, but how are you thinking about that?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [5]

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Yes. Yes. I mean as we're talking, and I'm saying yes to your latter question, James. There's going to be -- as we ramp up, as we're having initial conversations, there's going to clearly be capacity limits. I mean we operate at about 50% normally. So we will have guidelines in partnership with the local health officials around what do they feel comfortable with, and we know exactly what our counts are. We were already testing, before these operations, mobile ordering, virtual queuing, cashless as well as looking to enhance our security. So that will ramp up. It will depend by park. It will depend on how we do that.

But remember, we've been doing this before, and we know how to manage guests manually and coach them accordingly. So it will be in parallel. We'll do it manually to make sure people are clear, whether it's letting them know spots in line by paint, where they stand for social distancing. And as we ramp up the technology as we move forward, that'll allow people to know when they can come to the ride, when they can come to pick their food up, et cetera. We anticipate we'll be able to do those things over the next few months.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [6]

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Perfect. And then my second question, and I guess, first off, I wanted to really commend you guys and really congratulate you guys in terms of your efforts of extending liquidity and getting these covenants pushed back. That really was an impressive effort. But -- so I guess this question is for Lenny. How should I think about the covenants beyond 2020? Is it right to think about once we get into 1Q '21, we're doing the trailing 12 months with the last 3 quarters of 2019. Is that how that is going to work mechanically? And where does that leverage ratio now stand given the transaction that took place within the last couple of weeks? What's the total sort of debt amount we should be working with to back into the leverage number as we move forward?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [7]

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Yes. Lenny, why don't you go ahead and take that. Thanks, James.

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [8]

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Sure. So yes, you're exactly right as far as the mechanics of how the covenant will work. So for 2020, we've suspended the testing of our senior secured leverage ratio for 2021, each quarter will be replaced with the actual quarter for the Q -- quarter of 2021. So essentially, Q2 -- the Q1 test were used on the last 3 quarters of 2019. The Q2 test will use the first 2 quarters of '21 and the last 2 quarters of '19, et cetera, until we get through the full year of 2021. As we sit here today, our secured debt is made up of the new $725 million notes that we issued on April 22, and then $479 million of our term loans since we paid down $315 million of the term loan with the proceeds from the bond. As it relates to the revolver, the revolver also will factor into the calculation, and it's a rolling 4-quarter outstanding balance of the revolver on average. So you basically take each quarter that we have a revolver balance outstanding in the 4-quarter test period and use that average for the quarterly test base.

As we sit here today, the first quarter results were fairly in line with prior year, and we essentially paid down the majority -- or the $315 million of the term loan. So our secured leverage ratio as of the end of the quarter was a little over 2%. And that will obviously have pressure as we don't have operations for the portion of 2020 until we have our parks reopen, but again, we're using the test to replace the 2021 results with 2019 will help kind of modify that leverage ratio until we get full business.

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James Lloyd Hardiman, Wedbush Securities Inc., Research Division - MD of Equity Research [9]

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I guess what I'm trying to get at is, once we get into 2021, how far would EBITDA need to sort of fall versus the comparable quarter, which I guess would be 2019. How far would EBITDA need to fall for you to be in reach of that new covenant? And when would that -- forget about the when because we don't know what things are going to look like. But what's the magnitude of room that you have even once we get into 2021 with respect to those covenants?

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [10]

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Yes. Again, as you mentioned, it'd be hard to predict what happens in 2021, but we feel like we have ample cushion, especially using the 2019 results for Q1 and Q2 at a minimum, and then it'll be looking at how the business is performing after Q2 to determine essentially where we'll be on that covenant test. But we feel confident that right now, we have the liquidity and the flexibility and the covenants and make it through the 2021. If suspension of operations was longer and more pronounced into 2021 and we possibly have to go back to our credit facility lenders for additional covenanting.

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Operator [11]

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Your next question comes from the line of David Katz of Jefferies. There is currently no response from the line, we'll continue to the next question.

And the next question comes from the line of Tim Conder of Wells Fargo Securities.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [12]

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And gentlemen, again, congratulations on the effort with the liquidity and the responses, taking care of the employees and sounds like that's setting you up well again, to attract the right employees quickly back to when you can reopen. So on that line, Mike, I was a little bit actually pleasantly surprised. Do you think with implementing the lot of the new procedures and training and all that, you still think you'll be able to open in 2 to 3 weeks once you reach a decision point or get clearance, clarity on timing of when you can reopen.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [13]

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Yes, Tim, I hope you're well. And I appreciate you calling out our employees. Our park presidents have just done magnificent work. Our entire team has in keeping people positive. And I think it's important -- our full-time folks are a really important core with really important skill sets and experiences to operate the parks, and that's been a big part of our decision-making process in keeping those folks close. And yes, to answer your question. When you think about it, Tim, we had roughly about 11 parks. As I said, there were about 2 open. We had 7 that were open. So we had done a lot of the work, and we had really ramped up a lot of the work in anticipation of opening because we suspended operations March 13. So yes, and we've been doing the right stuff in the interim to get ready as we're having the conversation.

So we do feel confident, we've done it before, that we can get the parks up and running in 14 to 21 days, and teams are ready to do it. Now the last thing I would say, Tim, is it's going to be a new normal, right? So if we're fortunate enough to get the parks open, it's going to be something that's not obviously at full capacity. I'm sure it's going to be something that starts at 25%, ramps up in phase based on state and local guidelines, and we're prepared to do that. But as you know, today, we're able to open up parks and operate them day-to-day with relatively low levels of attendance to drive breakevens.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [14]

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Okay. And Mike, you said that under pre-COVID normal, on average, you were running about 50% of, let's just say, the fire code capacity of the park system. So are you saying that 25% of that 50% or 25% of the fire code, so to speak, capacity is what you would -- or kind of initially anticipating.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [15]

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Yes. So Tim, the first is it's really -- it's not a fire code number. It's what we would call 50% of a good experience, just to be clear. And the second thing is it's really going to depend on the local health authorities and the local officials, Tim. It's they're opening up states -- forget us for a minute. It's they're opening up states, they're creating guidelines on how they want to phase and reopen states and cities. And we're going to fall right in line with that. And that math is going to be dependent on how we can give everybody comfort that we create social distancing and ability to make sure that there is that social distancing in the park.

So when I use those numbers, it's really what we would consider a proper experience. What a lot of the initial feedback is from the locals is that they would see that, that 25% number is the first -- the number they would feel comfortable with us to create the right social distancing, the comfort. But again, that's going to vary. We're going to have that dialogue with the local folks as we move through this new normal.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [16]

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Okay. So again, that 25% would be 25% of what you historically have -- so -- indicated. So half of that 50%, right, and 25% collective.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [17]

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25% collective. That's right, Tim.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [18]

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Got it. Okay. And then at this point, granted Cali seems to have a little bit more heavier restrictions and then you've got the Northeast, New York, New Jersey area that had a lot more of the impact, unfortunately. Would you anticipate areas in Chicago also -- would you anticipate areas, say, maybe Texas, Georgia, areas that could open first prior to some of those other regions that have been impacted more severely by COVID?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [19]

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So it's another good point, Tim. We're tracking the numbers closely. I mean we look at all sorts of data, and we're talking to the local officials, and it's a moving target. But when you look at what's going on with the states, it would suggest that we should be staying close to Texas, Oklahoma, Georgia, Missouri and Mexico. And look, we're really regionally diversified as well.

As you know, I think the other part of this is we talked to all the state officials. Remember, not 1 of our parks represents even 10% of our company's EBITDA. So we're very diversified and I think that's a good Q for us. But those would seem to be the areas right now, whereas we're watching the state or the country dynamics that would suggest, ideally, we could open at some point, hopefully in the summer. But again, time will tell. There's a lot to be learned in the next few weeks as a lot of these states are opening, and they see how they're moving forward in terms of the broad state opening and what that means. But again, the good thing is we've got no park, that's more than 10% of the attendance base.

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Timothy Andrew Conder, Wells Fargo Securities, LLC, Research Division - MD and Senior Leisure Analyst [20]

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Okay. And last question, sir. And I appreciate all the transparency. And again, this question is subject to competitive, however you want to answer it. But on your Active Pass retention base or Lenny, if you want to take this, whoever feels comfortable here. The 10% you'd said at the end of Q1, down 20% currently. Again, not surprising, given everything that we're seeing, parks closed, and that will probably ramp up pretty quickly as people come to the parks, as you mentioned. But in the breakage that you're seeing, is that skewed -- of your customer base, is it skewed to more higher income customers within that base? Lower income customers? It's skewed more to newer? Or existing longer-term customers? Any color you could offer there.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [21]

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Yes. Tim, I can take this. And Lenny, if I miss anything, you can jump in. First of all, I think we're broadly comparative. I look at the industry in total. But I think the way I would think about the membership cancellations, Tim, is as follows. If you start with the baseline, let's just take membership. We basically -- we had come out of 2019 at about 2.6 million members. That was an 18% increase in our membership base. When you look at year-to-date 2020, active membership base has declined by about 14% to roughly 2.3 million members. Now about half of that was due to COVID-19. And we do anticipate that rate can increase if the crisis is prolonged.

Now what I would tell you that most of that reduction is due to credit cards being declined versus voluntary cancellations or pauses. So what we saw was about 5 points of that 14%, Tim, as roughly members canceling voluntarily with many just choosing to pause their memberships. So I wouldn't say as far as cohorts where you're going there. We're really -- we're seeing it just kind of more consistently across the board. So what we're doing, by the way, what I'll tell you what the actions are, which we've been public with is, we've been really clear with the members who we want to give offers to upgrade the membership level for the balance year. And that time, at the end of the membership, that's been well received. So people want to keep paying. They automatically upgrade. And we've also given the ability to pause. So that's probably, I think, the best way to respond to that. But it's been pretty consistent across the board. Okay?

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [22]

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Real quick to add on to that. Part of your question, I think, was related to the total Active Pass Base. And really, what we're seeing is the lost sales of not having the sales while the park churn operations is really what's driving the overall Active Pass Base down. So memberships are an important part, and that's what Mike was mentioning in his comments, but essentially, the big drop from the 14% to the 20% is really the fact that we're not selling passes to the same level we were last year while our parks are not operating.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [23]

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Beverlyn, and everybody, I would just ask, try to keep it to 1 question just because I know we have some technical issues and people joining late. So I do want to try to get through everybody's questions, if possible.

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Operator [24]

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Your next question comes from the line of Tyler Batory of Janney Capital Markets.

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Tyler Anton Batory, Janney Montgomery Scott LLC, Research Division - Director of Travel, Lodging and Leisure [25]

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A question I have is just on the expense side of things. And I know you can't get too specific in terms of guidance and whatnot. But can you talk to us about your expectations in terms of what the cost structure may look like going forward here? I mean certainly on the positive side, you guys are focused on being more efficient. On the negative side, I would assume some of the actions that you guys are implementing on the safety side of things. It could be a little bit of an offset. So when you look longer term, is it possible that those positives and negatives offset and you end up in the same place? Or do you think it's possible that there is a significant change in terms of what your cost structure looks like?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [26]

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Yes. So I think I'll take this, Lenny. I think the -- first, in terms of cost structure, maybe I'll get to burn rate, Tyler. As we said, we're going to be between this $30 million and $35 million per month burn rate. And I think that's what we see and what we see from an expense standpoint. I would say this, as far as the work we're doing, right now, we are still in the middle of it. We're looking at costs in terms of how the organization is set up. We're looking at park operations. We're looking at direct and indirect costs. Those are areas we're really digging into as a team. We're still in the middle of that work. And as we finish that work, we'll provide more clarity. Lenny, anything else you wanted to add on that?

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [27]

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No. I think as you mentioned, it's essentially -- we're sort of going through the entire cost base. But one thing to keep in mind is that none of our cost reduction measures, would ever do anything that would impact the safety of our employees or our guests. So safety has always been and will always be our #1 priority as it comes to cost measures.

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Operator [28]

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Your next question comes from the line of Ian Zaffino of Oppenheimer.

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Ian Alton Zaffino, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [29]

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Question would be on cash refunds. I don't believe you've given any -- at what point do you have to start giving them maybe you could frame the liability that you would face if you need to give refunds? And also, I just wanted to get a clarification as well on the park capacity. If you're saying it's -- that 25% number, what I'd imagine is your busiest days are substantially higher than 50%. And if you have to limit those substantially. You have other days like, so to say, during the week, that would be well below that 50% number. So I'm just trying to frame that impact. Is it actually -- could be lower than half of your guests because of the way the math works?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [30]

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Yes, Ian. So first on the refunds. I already covered the ground on members where we've given people the ability to voluntarily pause payments. And as far as refunds, if you're going to season pass holders, we've received a very few refund request to date. That could increase if the crisis is prolonged. And again, we're not contractually obligated to provide refunds. The majority of our pass holders and members have used their pass one or more times. Bottom line though is this, guest satisfaction is important to us. We're actively engaged in conversations to ensure added value and continued loyalty, and we'll continue to engage both with our season pass holders and our members.

In terms of capacity, we have the ability to schedule visits to the park, and we're being very thoughtful if -- when we have the pleasure of reopening the parks, how we monitor that, how we schedule folks to ensure we leverage the capacity or what I would say, the limits of capacity day-to-day, whether it's a weekday or a weekend. And that is, again, that's going to be something very driven in partnership with the local health authorities and city officials. There's nothing we're going to do that they're not comfortable with. That ensures the safety of our guests and the safety of our employees. So it's going to be very local, and we're going to work through that knowing what's comfortable for everybody and gives confidence in everybody's safety.

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Operator [31]

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Your next question comes from the line of Mike Swartz of SunTrust.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [32]

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Mike, just wanted to -- maybe a little clarification on the comment you made in your opening statements. I think you said, and correct me if I'm wrong, but that monthly rate of cash burn, the $30 million to $35 million doesn't include payments from your membership base? Is that what I heard?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [33]

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Yes. So it -- Lenny, you want to take this one? Go ahead.

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [34]

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So the $30 million to $35 million average monthly cash outflows kind of is at the high end right now of our range because we're currently maintaining a state of readiness to open our parks. The additional cost measures we'd be required to -- would be required to achieve the lower end of the range. Our average weighted cash outflow right now assumes the full suspension of our operations through December 31, 2020. The outgoing cash flows, assuming our current operating costs, including contractual rent payments in several of our parks. Contractually obligated capital expenditures for 2020 that can't be canceled or deferred.

Debt amortization and interest, our partnership park and distribution obligations of our federal state and local tax obligations. It does include minimum membership revenue and our international development revenue related to our Saudi Arabia project. But that's what's included in the $30 million to $35 million. So again, right now, we're at the high end of the range, and there's additional measures we'd have to take to get to that low end of the range and based on the dependency of how long the suspension of operations continues.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [35]

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Yes. I think Mike -- Mike, I think the key there is membership does create some upside. But we also, as I've said, we're preparing for the worst, hoping for the best. If we're in a minimal revenue environment or prolonged suspended operations, you assume that, that becomes minimal and decreasing over time. So any membership is as upside. And if we can open a park sooner, that creates upside versus the current model.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [36]

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Okay. Just to clarify, if members continue paying their monthly membership payments, it would be upside to that $30 million to $35 million, just another way to say that?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [37]

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That's right. It would.

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Michael Arlington Swartz, SunTrust Robinson Humphrey, Inc., Research Division - Senior Analyst [38]

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Okay. Okay. And then just 1 follow-up. Lenny, how should we be thinking about cash interest for the year?

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Leonard A. Russ, Six Flags Entertainment Corporation - Interim CFO and Senior VP of Strategic Planning & Analysis [39]

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So our cash interest for 2020 will be very similar to 2019. The first interest payment on the new 2020 -- on the new bonds that we issued isn't due until January 1, 2021.

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Operator [40]

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Your next question comes from the line of Brett Andress of KeyBanc Capital.

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Brett Richard Andress, KeyBanc Capital Markets Inc., Research Division - Associate VP [41]

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Just one more for me. So in terms of the guest survey that you did, which I think was very interesting, how many guests did you survey? And then did you see any regional differences in the responses that you got?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [42]

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So Brett, we've been surveying -- the answer is we've been surveying thousands of guests every week. We do that. Brett Petit's team, [Mark Cooper] and his team, they do really good work on this. We actively engage with our Active Pass Base, and they give us really good feedback. So before the pandemic we were -- and we really ramped it up. So it's been -- on a weekly basis, we're asking a lot of questions of guests. And it's in the thousands each week. And we look at it, and we're looking at it to see how folks are evolving in their sentiments, et cetera. So that's how we've been looking at it.

As far as regionally, pretty consistent. We're not seeing regional spikes, to get to the second part of your question. Pretty consistent. And we look across cohorts and everything. So it's -- again, we continue to look at it, but it's been fairly consistent, the results that we see here.

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Operator [43]

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Your next question comes from the line of Alex Maroccia of Berenberg.

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Alexander Rocco Maroccia, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [44]

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I understand it's going to be difficult to model any numbers until the parks start to reopen and we get more visibility into post-virus operations. However, given the comments earlier on the monthly membership dynamics after the 13th month, it sounds like you'll be recognizing membership revenue in Q2, even if the parks are closed for the entire time. Is this correct?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [45]

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Yes, Alex. So I think it's -- the answer is, I think it's going to depend. And I'm not trying to be vague. It's -- what we don't know is the time of opening in the parks. And what we don't know, based on that is the consumer household dynamic. Does that trigger more credit card defaults? Do we have more members wanting to pause? We're observing it every day. And I think -- so what we have been saying very transparently, we have been prepared for the worst, hoping for the best. If we keep those members, which today is approximately $2.3 million, yes, that does create upside. But we're also, as we talked about, we have seen about 14% of those members decrease since the beginning of the year and about 5 points of that was from COVID. So we think if there is a prolonged suspension of operations, that probably starts to get worse. So that's what we know today. That's what we've assumed today.

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Operator [46]

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Your next question comes from the line of Steve Wieczynski of Stifel.

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Steven Moyer Wieczynski, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research and Gaming & Leisure Research Analyst [47]

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So I actually wanted to ask a question about the first quarter, believe it or not, in the attendance in the first quarter, I guess. And Mike, you talked about the Texas Park being opened on weekends and new rides in California and better weather. But what really stands out is that 38% increase, I think you said in terms of single day tickets. Is there any way to understand a little more of what drove that increase? Was it something you guys were doing from the promotional side of things, whether it's simply just more demand in general? Or what were some of the things you guys did to drive that single day visitor?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [48]

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Yes. Thanks for asking. I hope you're doing well, Steve. So if you break -- let me break down the math first. It was prior to the park closures, the attendance was up about 255,000 guests so about 19%. And the single day ticket paid attendance was up 38%. Six Flags over Texas did a great job initiating their year-round operations in [Janet's tab]. Now that contributed about 6 points to that plus 19%, Steve, okay? So if you look at the base -- if you backed out over Texas, the base attendance was running up about 13% roughly. And where we really saw some nice momentum was, as I said, California. Magic Mountain did a really nice job. They have some really good programs. And that -- and I do think West Coast racers helped, and we did have some positive weather.

Now if I told you, real quick, that what I would say was a bit of the how and what we did, in simple terms, I think we started to get some things right, meaning, in terms of -- we first focused on where, and I'm giving you some of the revenue management logic. But we got really good by geocoding, targeting incremental attendance in the way of focus. Then we really closed on the what, which gets to the right consumer value. We're really clear looking at where had pricing moved up, what do we think was the right price in the market to convert a consumer incident. That was then the when.

So we also looked at what days do we want a plus up attendance where we had more capacity to sweat our assets. And the last thing I would say is I think the beauty of our CRM data is we're able to test this stuff before we put $0.01 discounts and allowance in the market. We can go online. We can survey consumers. We can test offers and they can engage with us and tell us if they think it's the right value or not. So that's basically what we were doing. And we're going to continue to refine that. It is an art and science, but that's effectively what we were doing.

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Operator [49]

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Your next question comes from the line of Ryan Sundby of William Blair.

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Ryan Ingemar Sundby, William Blair & Company L.L.C., Research Division - Research Analyst [50]

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Mike, are there any challenges with reopening the parts on a park-by-park basis? I mean it feels like most of these parks are running in a pretty decentralized way, but perhaps there's a mobile app with things like advertising and pass access. I mean within that, are there any differences in the way you're approaching the water parks versus the theme parks? Any color there would be great.

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [51]

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You bet. So as far as reopening by park, no, I actually think that's one of our strengths. We're very local. We're very regional. And as I said before, we've got 90% of our guests are within 150-mile radius of the parks. And we've been able to make that model work where we can plus up individual parks, and that was even the case in quarter 1 where we have -- in certain parks, we have defined schedules for based on their local markets.

As far as the water parks, no, we've been staying close to local health officials as we study bromine and the chlorine. We're finding that does the job. So that the process of us opening up a water park or a theme park, it is very much the same. The local health officials, the local city leaders, the state, they want to know everything we're doing, and we've got a really detailed playbook in how to do that. So what we're finding is it's more about how they feel about the opening up of the local market and then how they feel about density and social distancing, how that impacts the experience we give guests and consumers.

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Operator [52]

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Your next question comes from the line of [Clar Ingo] of Jefferies.

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Unidentified Analyst, [53]

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Sorry about before. I'm on for David Katz. We were juggling a few calls at the same time. The question is really more strategic and maybe perhaps you might have mentioned it on the Analyst Day before it was pulled. But throughout the surveys, were there any indications of potential product confusion between memberships and season passes? And would you -- or have you contemplated maybe using this reset to rightsize the product structure?

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Michael Spanos, Six Flags Entertainment Corporation - President, CEO & Director [54]

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Yes. So we are working through that. The other part of the strategic work we are looking at is we are looking at our revenue management pricing in terms of simplicity. And I think that's going to run across the gamut, whether it's single day paid attendance, throw passes, season passes, memberships. We're doing that work. We'll also looking at website. We're also looking at returns on marketing and other spends. Those are kind of the 3 major buckets we're looking at. And I think that would fall in there.

What I've told you, though, in the past, and I would reinforce it, I do believe it's an AM proposition. When you think about consumer demand occasions, the membership program, the Active Pass Program works because you've got loyal guests, loyal consumers. They have a higher frequency of use they're willing to trade up on the incentive curve, meaning they'll pay more for more value. And they have a bit more disposable or elastic discretionary income. Those are great guests, okay? They're really good guests, and we want them.

We also have value guests or value consumers. They may have more limited out-of-pocket spending. And they may only want to just come once for a certain reason. Now ideally, if they come once we flip them into Active Pass. But the bottom line is we need to be true to both. I do think we're going to need to have an end equation, and we were starting to see that we can, in fact, do that in Q1. We can grow that Active Pass Base and be smart and focused and really responsible in how we think about single day ticket. So that work will continue as we flush out the strategy.

Steve, I believe that was the last question. And to the folks, apologize about some of the technical difficulties we had. Let me -- what I'll do is let me -- I'll close out. I want to emphasize that we will open our parks, and our company and industry will emerge stronger. I am looking forward to seeing you in our parks when that day comes. I do want to thank all of you for joining our call, and most importantly, for your continued support. Please, everybody, take care and be safe. Thank you. Thanks, Beverlyn.

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Operator [55]

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This concludes today's conference call. You may now disconnect.